How Captain High Liner beat the dollar odds

On the surface, Henry Demone's story sounds dismayingly familiar. His fish processing business in Nova Scotia is acutely exposed to the high-flying Canadian dollar.

But don't expect another woe-is-me lament from a Canadian manufacturer blindsided by the soaring loonie.

The dollar's rise is, in fact, a shot in the arm for Mr. Demone's company, High Liner Foods Inc., which buys its raw fish on world markets denominated in depressed U.S. greenbacks. "We have had a little bit of luck with the dollar," Mr. Demone said from his office on the edge of the Atlantic Ocean in Lunenburg, N.S.

That's an understatement. The rising Canadian dollar is part of the reason High Liner is having some of the best financial results in its 110-year history. Profit is up strongly, rising almost 40 per cent to $20-million in fiscal 2009 on sales of $627-million.

High Liner's good times are a sharp reversal of the traditional pattern of Canadian manufacturers and processors, who complain vociferously that a soaring loonie undercuts their competitiveness on global, and particularly, U.S. markets.

Some nimble players have been able to swim against the tide, enjoying natural hedges against currency risks by sourcing a lot of their input costs in U.S. dollars. That has been the story at High Liner, which, aided by a timely acquisition and a value-added product strategy, offers a blueprint on how to cope in times of monetary uncertainty.

High Liner is protected because it creates branded seafood products out of raw material harvested the world over - in fact, 30 fish species from 20 countries. It does 55 per cent of its business in the United States but, with plants in both the U.S. and Canada, it moves very little of its processed products across the border, thus minimizing the Canada-U.S. currency risk.

The company is, however, exposed to exchange rate risk on the 45 per cent of its business conducted in Canada. But the recent outcome has been largely positive because its raw material of tilapia, haddock or sole is acquired in U.S. dollars while its value-added sales are in Canadian dollars.

In a highly competitive market, "the dollar helps, rather than hurts," Mr. Demone says.

That is not the only reason Mr. Demone's ship has finally come in. High Liner can add processing and packaging technology from Japan and the U.S. at costs relatively restrained by a strong Canadian currency.

It has introduced new products and participates in retail fish promotions that appeal to value-sensitive consumers. Even the economic crisis has worked in its favour by exerting downward pressure on commodity costs generally.

"Our business model is well suited to these times," Mr. Demone says.

Indeed, High Liner occupies a sweet spot that many processors and manufacturers would love to find. Jayson Myers, president of the Canadian Manufacturers & and Exporters, said a lot of Canadian companies try to balance the negative impact of an appreciating dollar by importing materials priced in U.S. dollars, taking on U.S.-dollar-denominated debt, or acquiring machinery, equipment or other goods in American currency.

But a lot of secondary manufacturers, in particular, remain highly dependent on U.S. exports. "The situation that hurts is when you don't have a lot of external imports and you depend on U.S. dollar sales."

High Liner's relative health also stands out in an Atlantic fishery grappling with big structural problems. Newfoundland and Labrador says the provincial fishery's value fell 22 per cent last year, partly because of depressed prices for such up-market species as snow crab and lobster. It also reflects the plight of Canadian producers that sell on world markets, thus taking a direct exchange rate hit.

Mr. Demone understands the fragility of currency and consumer markets. He doesn't like fast upward Canadian dollar movements, because they hurt other processors and industries, causing economic hardship that can wash back on his company.

"The Canadian dollar needs to go up in a measured amount over time," he said, giving Canadian companies time to adjust.

Adjustment has been the story of High Liner, once known as National Sea Products, a sprawling integrated fishing and processing company that emerged from a sweeping restructuring of the East Coast fishery in the 1980s.

An offspring of a Lunenburg fishing family, Mr. Demone, 55, took over as president in 1989, but watched the business struggle in the late 1980s and early '90s. Like many Canadian fish processors, it was hit hard by the collapse of Canadian cod stocks.

Around the world, he could see two models of integrated seafood companies that were able to grow: They focused on being very efficient at primary production, or they specialized in value-added processing, sales and marketing.

High Liner took the second tack and Mr. Demone eventually got out of the fishing fleet business, which had been his company's, and his family's, historical foundation.

The company got another boost recently by picking up assets in the selloff of FPI Ltd., a troubled seafood company based in St. John's. That brought a strong food service business in the United States, as well as production capacity in Newfoundland and Labrador. Recent results reflect the first synergies from that purchase, Mr. Demone says.

He also draws comfort from signs of rising fish stocks in some parts of the world - in Russia, Norway and the Baltic Sea, for example. "There is more good news that bad news," he said, and that augurs well for the future of the global industry.

He even sees some rebound of cod in Canadian waters, but cautions that while there is progress in 20-year comparisons, the numbers are not comparable to levels of 40 years ago.

In addition to natural hedges, High Liner is an active currency hedger for its Canadian markets; these days, those hedges cost money. In any given month, High Liner might have "a few hundred thousand dollars of hedges that are under water because the Canadian dollar is strong," Mr. Demone says.

But it is an important shock absorber, because, as he bitterly recalls, the Canadian dollar has also dropped precipitously in the past.

"This is a small price to pay for protection in a volatile world."